Stockholm (Ekonamik) – Central bank doves, fiscal concerns, low yields, political competition, a retail downgrade and flaring geopolitical tensions dominated the news flow this week.
Dovish Rates and Wobbling China
At their monetary policy meetings, the central banks of Russia and Turkey once again kept rates constant at 7.75% and 24%, respectively. Regarding the disappointing GDP growth in the first quarter, the Russian central bank lowered it inflation forecasts for 2019 and admitted to “the possibility of further key rate reduction at one of the upcoming Board of Directors’ meetings and a transition to neutral monetary policy until mid-2020.” In Turkey, the TCMB commented that it “will continue to use all available instruments in pursuit of the price stability objective. Factors affecting inflation will be closely monitored and, monetary stance will be determined to keep inflation in line with the targeted path.”
Still in emerging markets, Ekonamik noted the rebound of Malaysia, whose tough stock market has attracted investors again. Meanwhile, a monthly decrease in fixed asset investment in China seems to have disappointed the markets. In Hong Kong, protesters spent the week fighting a bill proposed by the city’s Chief Executive, Carrie Lam, allowing the extradition of criminals from Hong Kong to mainland China. An announced postponement of the bill has done little to assuage the concerns of protestors who would rather the whole measure be cancelled.
Low Yields, Mini-BOTs, Scandinavian Exclusions and New EU Leaders
In Europe, Scope Ratings warned against the fiscal risks of France‘s recent residency tax cut. The fall in 10-year German bunds to historical lows of -0,26% this week led Laureline Chatelain and Nadia Gharbi at Pictet to wonder whether the funding costs could fall any further.
In Spain, incumbent Socialist caretaker prime minister, Pedro Sanchez, is still trying to put together the coalition that King Felipe tasked him with building last week. Meanwhile, Italy still remains engulfed in its Mini-BOTs saga. The ECB’s Mario Draghi noted at the latest monetary policy meeting press conference that “about the mini-BOT, I think I’ve answered this question in the past when the possibility was raised; they are either money and then they are illegal, or they are debt and then that stock goes up. I’ll stop here. Certainly, the reading that people have and markets have of this mini-BOT doesn’t seem to be very positive, but I’m only just stopping at what I said; it’s either money or debt. I don’t think there is a third possibility.” Further to western Europe, Portugal recently launched the first Panda bonds from the Eurozone.
Among the Nordics, an organic food retailer in Sweden is boycotting Brazilian products on account of the country’s renewed use of controversial pesticides and deforestation of the rain forest. In Norway, parliament began taking steps to get the country’s sovereign wealth fund to move away from fossil fuels, beginning with divesting from coal producers, a decision that may affect Glencore and Anglo American.
In the UK, the contenders for the leadership of the Conservative party spent the week exchanging snipes at each other, unleashing a steady flow of unrealistic Brexit strategies, from not paying their bill to the EU to finding a way to bypass parliament.
Speaking of the EU, the backdoor negotiations for the upcoming European political cycle following the latest European Parliament election are reaching maturity. Given the general mistrust between Germany and France, we can exclude Weidmann, Lautenschläger, Coeure and Villeroy de Galhau for the top job at the ECB. After Draghi, it won’t be someone from Italy again and Spain is too close to France for de Guindos to be a viable option for Germany for the same reason that Knot would be too close to Germany for France’s taste. Our best guess is that someone from a small third country with monetary policy or political experience is likely to take over, which leaves Rehn, Liikanen, Mersch, Wunsch, Lane or Donnery in the running. No one seems to be giving the members from the East a shot. For the European Commission, France would like Barnier, while Merkel has stuck to the winning Sptizenkandidaten from the EPP, Manfred Weber. This week, Macron noted he would support Merkel herself as head of the EU’s executive branch. In the unlikely event that should that be the case, then the ECB might just become available to one of the French candidates, which is probably why Macron said this. Given that the European Parliament has a veto on the choice and that they are keen on having one of their own at the top job. Given that neither of the two largest centrist parties enjoys enough of a majority to get its own candidate through, ALDE’s Verhofstadt might just be the ideal candidate from a small country (Belgium) with experience (he was prime minister of Belgium in the 1990s) and pristine pro-European credentials. The only concern is that he might just be too much of a federalist for the German CSU to stomach.
US-Iran Tensions and Market Reactions
Across the pond, the week will probably be best remembered by Moody‘s downgrade of New York Mall’s muni bond to junk, in line with the insights we uncovered in last week’s review of real assets. As far as politics is concerned, the USA remains focused on the crowded Democratic primary, with Biden leading the only useful metric at the moment with the most party endorsements. Meanwhile, Nate Silver’s 538 poll of polls puts Trump‘s approval at 42.4%, not that far below the 45.5% he enjoyed upon taking the office of President.
However, the most salient development this week was the escalation of tensions between the USA and Iran over an attack that resulted in the explosion of an oil tanker in the Gulf of Oman. In a somewhat unprecedented move, the EU took a decidedly neutral stance stating it would “refrain from speculations and premature conclusions.” Following the incident on Wednesday, the Nymex WTI Crude Oil index rose from 51.14 to 52.28.
In stock markets, the S&P 500 index has recovered all the losses it made following Trump’s tariff threats to Mexico. As far as markets are concerned it doesn’t seem to matter whether the president actually made any gains with his threats. As long as the issue is dismissed, as it was during last week, then markets are happy to turn the page. The positive correlation of the US index with the French CAC 40, the UK’s FTSE 100/250, Italy’s FTSE MIB, Portugal’s PSI 20, Stockholm’s OMX 30, over the last three weeks only confirms this more.
In bond markets, the US Treasury yield curve and its Chinese counterpart both seemed to steepen marginally during the week, with the 3m-10yr spreads going from -14bps to -11bps and from 82bps to 80bps, respectively.
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